Transferring goods between inventory sites is a common business practice for most all companies. Goods are often comprised of sub-assemblies of smaller items, which must be transferred from one inventory site to another in the process of manufacturing and distributing the goods. As such, the appropriate valuation and analysis of transferable item costs has become a key factor in successful business management. Although several costing methods exist, absorption costing is commonly used.
Absorption costing is an approach to inventory valuation that involves assigning a cost to a transferable item in inventory, where the cost is determined by summing the value of the items transferred and any freight or other charges incurred as a result of the transfer. Most all companies use computer software to perform the absorption costing analysis for transfers between various inventory sites or “cost groups.” The software will perform the necessary operations to determine the average cost of each item involved, and determine an optimal sequence for the costing of each item involved.
Although the costing sequence may be relatively easy to determine in simple scenarios, the manufacture and distribution of a good comprised of many items and subassemblies often creates more complex scenarios. For example, the determination of a costing sequence is made more complicated by an item appearing in multiple levels within the bill of materials, especially when the item is transferred between multiple cost groups. Consequently, the number of operations that the software must perform in these more complex scenarios may become very large.